Parent to Child Exclusion
The parent-to-child exclusion
With the passage of Proposition 13 in June 1978, base-year values were established for all properties in California. For people who owned property on March 1 1975, the base year was established as of that date. Subsequent base year values were established whenever property changed ownership or there was new construction. As time went on and property values increased, base-year values established in later years were substantially higher than earlier base-year values. People who bought or built property understood that their taxes would be higher than the prior owner's taxes, but children who inherited real property from their parents, which is also a change of ownership, also saw their taxes double or triple because the parents' lower base-year value disappeared.
Help Your Children Keep Your Base-Year Value
In order to encourage continuing family ownership of property, California voters passed Proposition 58 in November 1986, which permits parents and children to transfer a principal place of residence without limit as to taxable value. It also allows the transfer of other real property such as land, apartments, business or farms with a taxable value of up to $1,000,000 per parent without requiring the Assessor to reassess the property (Revenue and Taxation Code 63.1).
Mr and Mrs Jones want to gift their home, which has a 1996 factored base-year value of $59,032 (their original 1975 base year value of $40,000 factored forward by the Proposition 13 mandatory inflation factor not to exceed 2% per year) to their daughter. Their current property tax bill is approximately $600 per year. However, the current value of the home is $195,000 (which would be the new base-year value) and without the parent-to-child exclusion, the daughter's taxes would jump to approximately $2,000 per year.
The Details Matter
To qualify, the parents and children must sign an Application for Exclusion from Reassessment and submit it to our office. Please remember that the transfer must be direct from the parent to the children and cannot be done through a third-party, such as a tax-free exchange. It is also vital to keep in mind that only property held by parents or children or their revocable or irrevocable trusts are covered by this exclusion, i.e. partnerships, corporations and other limited liability entities are not parents.
If the title is in the name of a legal entity (other than a trust), it must be transferred first to the underlying family members, then transferred to the children (or parents as the case may be) and then transferred back to the legal entity if that is desired. Since these in-and-out transfers can have serious income, estate and capital gains tax implications, anyone holding family property in (or thinking of putting family property into) a legal entity (other than a revocable / irrevocable trust) should contact their legal and financial advisors before making any changes.
Also please note that a grandparent cannot transfer directly to a grandchild unless all the parents of that grandchild (including any step-parents) are deceased. A two-step process through the intervening generation ([grand]parent to parent to [grand]child) is permitted but may have income, gift and estate tax consequences.